Beware of IPOs Wearing Bright Colors

December 16, 2011

Dolly was a sheep AND a clone. Sometimes, one visual metaphor can do the work of two.

 

This was the easiest bet on the board.

First, read this genius post that we wrote back in January. It’s about Groupon, the 2011 equivalent of Pets.com or Atari. Unfortunately, there’s no such thing as shorting the stock of a privately held company, or we’d soon be sipping mai tais on the Moon with all the money that we’d have made by predicting Groupon’s demise.

Groupon went public on November 4, finally trading on the New York Stock Exchange after a long courtship period as the new initial public offering darling of the decade. Like LeBron James’ The Decision, only if it was the precursor to a brief honeymoon, followed by an intractable period of anxious consumers waiting patiently and wondering if they’d ever see a return on their investment or if it would crater to zero.

(The 2011-12 NBA season, everyone!)

Six weeks in, Groupon has fallen 10% from its IPO value. The company’s market capitalization is $14.72 billion. That’s more than the market cap of Bed, Bath & Beyond, which is the largest retailer of its kind; a 40-year old company with 1000 stores that actually sells something tangible and turns a healthy profit.  Some Groupon stockholders are holding shares in the hopes that someone more naive will eventually take them off their hands. And presumably, some stockholders think Groupon will permanently increase in value and become a blue chip. These people are buffoons.

Groupon went from local (Chicago) player to international media subject last year. The company’s point of differentiation was groundbreaking, and it was hard to believe no one had thought of it before. Unfortunately for Groupon, plenty of people have thought of it since. You can’t patent the concept of temporary mass discounts, thus Groupon has watched its market share get eaten away by Living Social and other competitors; EverSave, GroupBuy, YourBestDeals, and more combinations of everyday words featuring medial capitals.

As if competition from other startups wasn’t enough, part of getting featured in the business media is having established companies take notice and then try to crush you like a bug. AmazonLocal and Google Offers joined the party in the last few months, as did similar sites from AT&T and American Express, each offering a service indistinguishable from Groupon’s. Unlike Groupon, the others can withstand heavy losses.

And lose they do. Last year Groupon took in $713 million in revenue, the most ever for a company so young. If you think that’s impressive, you’ll be equally impressed to discover that there’s a quantity called “expenses” that’s exactly as important as revenue is.

If you’re unfamiliar, which many people seem to be, here’s how Groupon works in two sentences. Its sales staff hits up a local business, promising it a minimum number of customers if the company temporarily offers a huge discount on some item (a “group coupon”, if you will.) Customers download the coupon from Groupon.com, the catch being that the promised minimum number of customers have to download the coupon or the discount won’t activate.

Sounds great in theory. Why doesn’t it work in practice?

To be kind, most of the businesses aren’t what you’d call sophisticated. Plenty of them refuse to do the math and end up giving away the store, and those are the ones for whom Groupon works best. (As for those businesses which Groupon doesn’t create any new customers for, if no one wants your discounted product via Groupon, at least it didn’t cost you anything to discover that.)

Continuing with our sexist observations, visit Groupon.com and see what most of the deals are for. Spa treatments. Hair coloring. Tapas.

(Aside: Here’s advice for anyone looking to enter the retail business. Sell a product that only men buy. Time is money, and you’ll reduce expenses on every sale. Men, or at least all the men you’d want to associate with, don’t bog down the process with an endless series of questions. They pays their money and they gets out. Meanwhile, most women can’t make it to the counter without seeing how long they can make the transaction last. “Is this low-fat?” “What’s your return policy?” “Didn’t you have this on sale last week?” “Was it made in a factory where they have peanuts?” “Are these ‘blood’ diamonds?” “Will this shrink if I put it in the dryer?” [Read the freaking label.])

What does a merchant learn by partnering with Groupon? More than anything else, where to find the price-sensitive buyers. Which is to say, the worst customers imaginable. The ones who will be loyal to your brand only if you continue to provide the best loss leaders.

Groupon is advertising, not sales. Not that there’s anything wrong with the former, but it should always be secondary to the latter. Remember that next time you invest in a company with negative earnings and a business model that’s easy to copy.

**This article is the pick of the week of the Top Personal Finance Posts of the Week – Merry Christmas Edition**

Filed Under: Capitalism, Education, Finance, Investments Tagged With: , , , , ,

Opportunity. It’s staring you in the face.

December 14, 2011

He keeps his phone on the belt loop of his khakis? Never would have guessed that.

 

Clark Howard, that empty golf shirt, recently rehashed his same old pablum into yet another book. Its banner reads, “It’s not what you earn, it’s what you save!” This is wrong on so many levels, but the main one is this: there’s a limit to how much you can save. There’s no limit to how much you can earn.

(NOTE for ladies and excessively cultured men: this post continues with a two-paragraph sports analogy. If you hate sports analogies, which Frank Luntz says you do, skip to the subsequent two paragraphs for a comparable analogy about…weight loss! Because everyone knows that women obsess about their weight. Hey, we’re just the messengers. Blame Luntz, the guy who says you’re easy to categorize.)

Most personal finance advice is the equivalent of a baseball manager who obsesses over pitching and defense to the exclusion and detriment of everything else. (Looking at you, Bud Black.) Each runner you allow on base could end up losing the game for you, therefore each is a problem that needs to be rectified. More important is the overarching meta-problem of reducing the number of baserunners you allow in the first place.

Nowhere in this development does anyone ask, “Wouldn’t it give us far more margin for error and make life a lot easier if we, I don’t know, scored some runs?”

Most obese people who make the requisite half-hearted public attempt to improve their bodies concentrate on one thing: minimizing intake. Minimizing for calories, or fat, or carbohydrates, some variable. If I only pare the volume that I swallow down to a workable size, I can turn from spherical into some more streamlined shape.

Again, it’s an obsession with the subtractive side of the ledger, rather than the additive side. The fat people who at least attempt to restrict their diets vastly outweigh (hey-oh!) the fat people who instead concentrate on building up – on powering their bodies by regularly lifting weights and doing cardiovascular exercise.

(Some of you are reading that last sentence and saying, “Well, of course the fat people who obsess on slimming outnumber the ones who focus on building muscle and thus increasing their metabolisms: eventually, the latter won’t be fat.”)

Exactly.

Same goes for your finances. The cacophony of people who can’t shut up about carpooling, repairing holes in clothes and making their own soap is deafening. The message is clear, if flawed: scrimp, or skimp, as much as possible. Do without. Justify every purchase you make. At the very least, you’ll overload yourself with doubt, and opt not to buy the item in question just so you can give your brain a rest.

Do that, and you’ll free up money to…pay your creditors with. Not that you shouldn’t pay your debts, but the goal with this method is zero, null, cipher, nought, ought. Getting out of the negative and staying there.

Here’s a truth that’s so self-evident, tens of millions of people either miss it or are too dumb to act on it: paying bills is a lot easier when you have more money.

Hey, thanks a lot, Control Your Cash. Is water wet?

Strictly for research purposes, we counted 628 coupons in our most recent Sunday paper. Looking at each one and determining whether it’s for something we’d be interested in would have taken about 37 minutes, extrapolating from the few coupons we looked at. It takes considerably longer to cut them out than it does to look at them, which would make this close to a 2-hour ritual every week.

Yet some people swear by it. You saved $47.11 on groceries? Good for you. Every little bit helps, presumably.

Instead of spending 104 hours a year whittling down your grocery bill, try something different. Spend half that much time researching rental properties. They’re there for the asking. Make an offer on a modest little townhome in a refined part of town. Or a 2-bedroom condo in a slightly worse part of town. Find office space in an industrial park – there’s tons of it, everywhere except North Dakota. Finance it and rent it out to someone. Make friends with a realtor and let her do all the legwork. They work on commission, and most are sufficiently motivated to help you find something.

Yes, we’re telling you to take on more debt. Leverageable debt. As we’ve demonstrated again and again, you aren’t going to build wealth on a salary.

Here’s an example. We visited the Multiple Listing Service site for Seattle, Sea.TheMLSOnline.com, and found 13 townhouses that sit on golf courses. The cheapest of these townhouses is a 2-bedroom number that’s listed at $145,000. In case you haven’t been paying attention the last 3 years, it’s something of a buyer’s market. By the way, this research took us less than a minute. If you’re committed to earning money, and willing to spend a little more time, and actually live in the city where you plan to invest, you can find opportunities like this everywhere.

This unit will close at something like $135,000. Thirty-year fixed-rate mortgages are going for around 3.96% right now. Put $27,000 down, and your monthly payments will be $513.12. If you can rent it out for a modest $970 a month, you’ll clear $5400 a year. That’s an enormous return. Yes, a property manager and a home repair warranty will eat up part of that, but you’ll build equity on an asset that will probably grow in value. After all, scarcity is everything: they can’t cram another townhouse onto the 14th fairway. Best of all, your eventual renters are probably comparison shopping for laundry detergent as we speak.

But you didn’t learn “landlordship” in high school or college. They don’t teach that. Instead they teach Scandinavian history and modern dance.

Opportunities are there. You don’t need anything more than middle-school mathematical and English proficiency to take advantage of them, either. Why aren’t you rich?

**This article is featured in the Best of Money Carnival #134, The Christmas Songs Edition**

Filed Under: Capitalism, Finance, Investments, Making Smart Choices Tagged With: , , , ,

The Wealthy Really Are Better Than You

September 9, 2011

Better than you. Better-looking, too, if you're Henry Waxman.

Sooner or later, every website with a passing interest in personal finance posts some version of “The X Habits of Wealthy People”. You know how these lists are going to end before they start. Yeah, rich folks spend less than they earn and don’t drive ostentatious cars. Great, what else you got?

First, that’s not even true. Just because Warren Buffett inexplicably lives in a 53-year old house doesn’t mean that Larry Ellison or Paul Allen does. Despite what you’ve been told, frugality is only a tiny part of this. (But frugality is also the easiest personal finance subtopic to write about, which is why right now some idiot personal finance blogger is crafting a post on how you can save .1¢ per wipe if you buy toilet paper by the ton.)

A note on frugality: when I was 14, my best friend’s father was a successful eyeglass salesman. Regional sales manager, or something. Knowing I’d be entering the workforce soon, and wondering what I’d have to do to beat out the other applicants for that first coveted busboy position, I asked him what he looked for when hiring. His answer?

“Big spenders. I want a guy who orders the lobster and the most expensive bottle of wine, who wears Harry Rosen suits and drives a BMW.”

Why?

“Because he’ll be motivated. He’s got bills to pay and a lifestyle to maintain, so he has to make his quotas whether he wants to or not.”

There are plenty of people who spend less than they earn and who drive Ford Tauri. The vast majority of them aren’t rich.

If you’re not rich, and see no prospects of ever becoming rich, it’s not because you aren’t working hard enough. This should be obvious. Even if you cut out early every afternoon and only work 35 hours a week, how many hours a week do you think the world’s hardest-working rich person is putting in? 350? 35,000? No, clearly the relationship between hours put in and rewards achieved is not a direct one. Or at least not a linear one.
Here’s what rich people do that really does distinguish them from ordinary folk. These are easy to adopt, and don’t even require you to sacrifice that much in the short term, if at all. You just need to think differently.

1. They understand leverage. And its offspring, passive income. There’s an entire generation of financially responsible but unimaginative people who blame the Great Depression for their failure to lead dynamic lives, and who took the mantra “neither a borrower nor a lender be” as Scripture. (It’s actually Shakespeare. Hamlet.) Fortunately, those people are dying off.

Spend money to make money. And borrow it, too. You borrow money to leverage your existing assets. You don’t borrow money to finance a vacation. A 6% commercial bank loan to purchase an office building, whose offices you then lease out to tenants, who make rent payments to you that a) you use to cover your mortgage payments and b) write off your taxes, while you keep the difference, is money well borrowed. An unimaginative frugal person who doesn’t know any better sees that original bank loan as a sleeping tiger. A rich person sees it as the first step to a sustained cash flow.

2. Rich people aren’t “being lived”. As opposed to living. No wealthy person beseeches anyone for a raise. Or does the prep work, explaining his worth to the company and why he’s entitled to more. Being rich starts with the self-determination, as counterintuitive and pollyanaish as that sounds.

The thing is, you probably know this instinctively. Who’s more likely to get rich:

a) The college-educated junior account coordinator who stays late and delivers her sales reports to the boss a day early, hoping to get noticed to the point where she can become an account executive one day and do more of the same, or
b) The immigrant with a shaky command of English who borrows from his cousin to open a falafel stand?

The first couple of years, their incomes might not differ by much. The immigrant might even work longer hours. But his success is contingent on him, and no one else. So is his failure, if any. No one can promote him, but no one can fire him. The point isn’t that all immigrant food vendors get rich. The point is that by living self-determined lives, they’re in a better position to create wealth than the junior account coordinator who’s waiting for the person above her to transfer/get fired/have a baby.

If a rich person wants more money, he creates it. By soliciting another client. By creating and promoting another product. By using another passive income stream. Not by hoping to catch the boss during one of his rare generous moods.

3. They care about output, not input. See our prior post about this.

It doesn’t matter how many hours you worked, it matter how many widgets you created. In fact, it doesn’t even matter how many widgets you created, it matters how much revenue they brought in. And even that is less important than how much profit they generated. (And if you don’t understand the difference between revenue and profit, buy the freaking book already.)

Or take the office building example from above. Once you get enough good tenants in there to fill it, the money starts flowing in with marginal effort. If Tim Cook flies to Helsinki for a ski trip next week instead of going to work, a few thousand iPads are still going to be sold. But the employee who relies on income for sustenance has to apply himself for every dollar. Which brings us to:

4. Wealth ≠ income. Not even close. There’s a reason why the ultra-rich usually keep quiet when Congress discusses raising tax rates on high-income people. Because confiscating more and more of a hard-working person’s income has little bearing on a rich person’s ability to build wealth. Capital gains, IRA proceeds, investment appreciation…whatever its name, money that they don’t directly work for is what separates the rich from the never-will-be.

5. Dust yourself off. Even if you don’t pick up as many clients as you like, or go half a day without having to open the register, a wealthy-person-in-training has a permanent internal motivator; memories of how badly life sucked taking orders at the old job.

6. (Of course) Buy assets, sell liabilities. Put $150 a month in an IRA, or put it in cigarettes by the carton?

**Best Article of the Week in the 121st Edition of the Best of Money Carnival**

Filed Under: Entrepreneurship, Finance, Investments, Making Smart Choices, Personal Finance Tagged With: , , , , ,
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